First half ending on a bum note

We can work it out…

There’s nothing like a drive-by borrower getting a deal in while the markets are riled, with another sneaking one away as well as it tags along in its slipstream. Those two borrowers in Thursday’s session were BP with a three-tranche offering and O2 Telefonica Deutschland. Importantly, it just goes to show that the window is open for non-financial corporate borrowers in IG as judged by the investor interest for the risk on offer. Otherwise, it was yet another difficult session for risk assets as the ramifications of the likely global trade war play out.

Chinese stocks continued their decline as did its currency against the dollar peg. European stocks followed suit and will certainly close the month and first half of the year in the red. The DAX was off almost 2% at one stage, for example. Rates were slightly better bid in the session and the 10-year benchmark Bund yield once again saw 0.30% intraday.

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Policy on the hoof riles markets

That’s about it until September…

The markets are not being kind to primary credit at the moment, leaving a whole host of potential corporate borrowers possibly flustered. We think that the window to get deals away is open, but few dare pull the trigger while equities are falling so consistently and there is a clear bid for safe havens, just as there was once again in Wednesday’s session.

The persistent air of crisis doesn’t exactly breathe confidence into the corporate bond investment process. The runway is backed-up and we’re going to be well into July before this backlog has cleared – if it needs to be shifted before the summer break. That’s because there’s a lot in the pipeline which can wait until the September reopening. Some will choose to wait so as to not pay up.

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Who needs enemies with friends like…

Trade war tops the bill

The concern we all have about the unfolding trade war remains the pivotal issue for the market. The UK has additional concerns given how big business is now throwing its toys out of the pram and reducing UK investment – with spending plans apparently being thwarted because of Brexit. Risk assets failed to gain any traction to pull out of the misery being heaped on them and with the trade war saga having legs in it yet, we are going to close the first half out in somewhat depressed fashion.

For instance, the engine of the Eurozone’s industrial might, Germany, is going to see her stock market lower by 5% or more for the first half, should the DAX fail to rise from current levels. And we will second-guess that the outcome of the EU meeting this week will be no agreement (read fudge) on immigration, the budget and Brexit.

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A messy end to the first half in prospect

As we’re off to jittery start to the week…

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Batteries need recharging

Markets lacking inspiration…

We might have closed out on the front foot, but that was another damp squib of a week to have traded through, with little really to give inspiration. It seems like that there have been too many of these weeks this year. It leaves us heading into the 6-8 week summer lull/break failing to get total returns for most risk assets classes into the black, year-to-date. It’s not been a great opening half of the year. We have had to contend with a high level of potential event risk over the past 2-3 years, and now we have moved a leg higher with the Trump agenda on import tariffs very likely set to plunge the global economy into a trade war.

The EU finds itself dragged into difficult situations such that it fights on several fronts taking in Brexit, US trade tariffs, the Italian political situation and dissent emerging from the Eastern European/Austrian block. It promises to be as difficult and uncertain a second half of the year as has been the first. The headline risks at a minimum will most likely stifle any material rallies. We’re already seeing some of the impact on the region, with data out at the end of last week highlighting the continued slowing of the manufacturing sector (in Germany and France).

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Political risk returns

Primary window might close…

The markets played out to a defensive tone in the week’s penultimate session as it took in the implications of the trade war as seen through Daimler’s profit warning as well as the appointment of Eurosceptic lawmakers to key posts in the Italian economic ministry. Not that we would have noticed that in the corporate bond market as investors took on board a plethora of deals which were higher beta in nature. The flow of deals suggests that for now (or for Thursday’s session) we are comfortable to take down primary market credit risk which will likely come ‘plentiful and cheap’ ahead of the market closing down for the summer, next month.

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UK rebellion off

Respite session welcomed…

It was a regular day in the markets on Wednesday and a better one for risk assets to go with it. Geopolitical and macroeconomic event risk took a back seat and it seemed like the whole of the market converged on Westminster for that crucial EU Withdrawal Bill vote. It was last chance saloon for the remainers to get Parliament to have a ‘meaningful’ vote on any final deal which the UK government may or may not agree with the EU. They failed with some sort of fudge agreed which effectively kicked the can down the road (to January). In credit, borrowers queued up to get deals away and there was a clear financials bias to the supply although several non-financial issuers were also on the screens.

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It IS a big deal

Tweetie pie is back…

The investor base in the euro-denominated corporate bond market would have been left massively deflated after Bayer decided to pull the trigger on $15bn of issuance in the US, and only €5bn here. We had the appetite and willingness to take down much more.

Even as most were fretting about an escalation in the US/China trade war, the chemical giant had no problem with getting its 4-tranche offering away. There’s always interest (over €22bn worth of it) for a good name (defensive and solid in this case), where the price is attractive for the quality on offer. The heightening Washington/Beijing tensions was a side issue for this well-flagged deal.

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Running scared

It’s more than a rumble…

No sign of the expected deluge of issuance. It will come. Instead, we’ve kicked off the week in defensive mode reflecting and fearful on the outcome of the US import tariffs against Chinese imports – and the retaliation. It wasn’t necessarily a very bad session – just soft, reflecting the potential risks which come from what is looking like an intractable trade war.

It doesn’t look good. So weaker equities followed, oil prices declined, credit did very little and rates received a little bid. Sterling was again under pressure as the BOE’s MPC meets this week, with no change expected amid a weak(ening) domestic UK economy.

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ECB gives credit a leg up

Time to roll up those sleeves…

The ECB has given every reason for credit markets to get bullish for the next 9 – 12 months. They’re not moving on rates. Admittedly, QE is ending, but fundamentals remain supportive and technicals will take on a different – but also supportive – dynamic. The bid for rates makes credit even more attractive. US rates are cheap (with the 10-year stuck in  2.75-3% range) versus Bunds/Gilts/JGB markets and the 10-year there has a solid bid behind it, adding to the flattening of the curve. Higher US policy rates might dampen inflation levels over the medium term, too. Credit has lost some of its lustre this year after a positive start, and spreads have gapped wider in all sectors. We think that they might be due for a spell of tightening now.

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